MasterCard Benefits From the Global Shift in Commerce

by Jason Jenkins, Investment U Research
Tuesday, December 27, 2011

‘Tis the season not only for gift giving, but also reflection.

I’m not talking about the sentimental stuff that we should all be thankful for in our lives, but the quintessential year in review. Everybody does it – from radio stations to cable television – we look back at the best and the worst of the past year. The financial world does it, too.

So I thought it would be interesting to go through some of these lists of 2011 best performers by financial publications and see what not only looked good now, but also has the chops to be good down the road. The first equity to catch my attention was Fortune 500′s No. 3 top-performing stock of 2011: MasterCard (NYSE: MA).

MasterCard is benefiting from a fundamental shift in the way the world conducts business. The world is shifting to electronic forms of payment, and business is becoming increasingly global. MasterCard is well positioned to benefit from both these trends.

The Numbers Are Strong

MasterCard not only has strong fundamentals, but strong financials, as well. Its operating margin for the first nine months of 2011 was 54.6 percent, up from 53.2 percent a year ago, and the company has publicly stated that it will keep margins above 50 percent, despite heavy investments across all of its divisions, as well as acquisition expenses.

The company requires very little capital to grow. Free cash flow is almost equal to operating cash flow. In 2010 the operating cash flow was $1.697 billion, while free cash flow was $1.636 billion. A lot of cash is available to return to shareholders or can be used for growth opportunities.

Two Misconceptions About MasterCard

It’s not a financial company anymore. MasterCard has shifted into more of a technology company, giving us better ways to do global business. MasterCard has also been aggressively investing in technology and expanding partnerships to boost its presence on mobile platforms. Its PayPass technology works with Google’s Android Wallet application – where you can make payments with your mobile phone.

Some may say that MasterCard’s stock has been depressed by fears and the numbers that show a reduction in consumer spending. But that misses the point. MasterCard is only concerned with the manner in which the transaction occurs. Future growth potential is monstrous. Cash and checks account for around 85 percent of the world’s $15.7 trillion of total global payment transactions. That’s a tremendous opportunity to convert those transactions into electronic payments.

MasterCard is poised for further success, due to the following:

Debit card companies got an early Christmas gift when this summer the Fed decided that banks could charge fees of up to $0.45 for a debit card purchase. That’s double the original limits proposed under Dodd-Frank.

Over 60 percent of its revenue comes from markets other than the United States and those markets are rapidly growing. They saw 20 percent third quarter growth in emerging markets such as Latin America and APMEA (Asia Pacific, Middle East and Australia).

There’s huge growth overseas and domestically. Last month CEO Ajay Banga stated that, “Volume growth in the United States of almost 14 percent was led by strong debit results aided by the roll on of business wins and double-digit increases in our commercial credit business. Despite persistently high unemployment rates and a weak housing market that has resulted in the low levels of consumer sentiment that we all read about, we are still seeing the consumer spend.”

As we have previously written, MasterCard has aggressively moved into the e-commerce and mobile payment solutions arena. Cash doesn’t work online.

Good investing,

Jason Jenkins

Article by Investment U